Adapting the Technology Incubator Model to Meet Local Development Demands

30 Jun, 2008

By: Kevin M. Mayer

Announcements about technology incubators seldom grab the biggest headlines. They lack the impact of, say, a new auto assembly plant. Whereas an auto plant typically represents an investment of hundreds of millions of dollars, the launch of a technology incubator, at the high end, might cost 10 million. An auto plant employs hundreds, even thousands; an incubator, perhaps dozens. A new auto plant typically requires a contiguous plot covering 1,000-plus acres; an incubator, office or lab space covering a few tens of thousands of square feet.
But while a technology incubator may seem unprepossessing, it has an important role in economic development. The launch of a technology incubator is within the means of many communities. According to the National Business Incubation Association (NBIA), there are about 450 technology-focused incubators across the nation, and a new one is announced every few weeks. (In contrast, a new auto assembly plant is announced every year or two.) Also, they are relatively efficient subsidy vehicles. The NBIA estimates that for business incubators, the public subsidy per job created amounts to about $1,100. (For an auto assembly plant, the figure typically rises to the tens of thousands.)
Even more important, the technology incubator, as a tool of economic development, is highly adaptable. There are many kinds of technology incubators. Some are focused on particular technologies, and some make room for different kinds of technologies, or accommodate both technology-oriented companies and other types of companies. Some incubators are affiliated with a single sponsor – an economic development organization, a university or a technology park – and others have multiple affiliations or are freestanding. Some are located in urban centers and some are located in suburban or rural areas.
Most technology incubators receive some kind of public funding or academic supportand are constituted to enhance local or regional economic development. For-profit technology incubators exist, but they are relatively few. Only about 6 percent of business incubators are sponsored byfor-profit entities. And often these institutions are not even called incubators. They may be called accelerators, econets, metacompanies or corporate venture arms. (Many such institutions are backedby venture capital or designed to harmonize a corporation’s portfolio of acquired start-ups.) They enjoyed their greatest prominence during the dot-com boom. During the dot-com bust, many of these incubators failed. (At the time, one wag commented that some of the failed incubators might have been better called incinerators!)
Nowadays, incubators seem removed from both the terrifying lows and the dizzying highs of another era. If anything, they seem too sedate. Along with microcredit programs, they could be said to offer modest returns on modest investments. And, when it is pointed out that the survival rate for incubator graduates exceeds 80 percent, a rate far better than the rate for non-incubated start-up companies, skeptics note that such success is unsurprising, giventhat incubators carefully screen prospective tenants, selecting those fated to thrive in any case.
Sometimes it does seem that technology incubators are underappreciated. Perhaps they will stay in the background until a clever economist figures out the appropriate metrics for quantifying their success or failure. Traditional metrics – jobs created, revenues earned – miss an essentialquality, the ability of incubators to create connections. To appreciate this quality, we might return to the contrast between large industrial sites and the relatively tiny incubator sites. Part of the reason new industrial sites are so large is that they include their own buffer zones. They minimize contact between the industrial operations within and the community beyond the property line. Whoneeds complaints about noise, traffic and emissions? Who needs to be hemmed in by residential development when expansions are contemplated?
Incubators, in contrast, promote interaction.They prefer to be in proximity to others, particularly universities and science parks. (In fact, they are sometimes extensions of, or located within, these institutions.) This way they can maximize interactions among scientists, business consultants and venture capitalists. They can help bridge the gap between scientific discovery and commercial development, spurring the creation of technology-based products and services, hastening the emergence of industry clusters.
The typical incubator is a multi-tenant facility that provides space to startup companies, often at below-market rents. Incubator tenants that qualify for admission are usually expected to graduate after a few years, during which time they may take advantage of shared resources, which range from ordinary office services to business consulting to facilitated interactions with potential investors.
There is no shortage of advice on best practices for the management of incubators. Still evolving, however, are ideas on how incubators may be adapted to meet the needs of disparate localities. Although an incubator is a flexible instrument, it is not necessarily the answer to every economic development challenge. And while an incubator may be highly recommended in some localities, it may, by itself, prove insufficient. For example, an incubator may produce a stream of promising graduate companies, but these may disperse, contributing to economies elsewhere, if they cannot find adequate facilities nearby.
A technology incubator should at least be considered if scientific research is being conducted in the region. Most often, this means research being carried out at universities. Particularly promising are universities that maintain formal technology transfer processes. But while research indicates academic knowledge transfers are associated with localized increases in related economic activities, these increases may be too small to be sustained. According to Attila Vargaof the Regional Research Institute, West Virginia University, “Strengthening universities to advance local economies can be a good option for a relatively well-developed metropolitan area but not necessarily for a lagging high-technology region. For the latter, a more comprehensive approach is needed, including a complex regional economic development plan that targets not only local academic institutions, but also high-technology employment, business services and small firms.”*
According to the Appalachian Regional Commission (ARC), 85 incubators that responded to a survey indicated that they had spun out 1,300 companies into surrounding communities, creating 38,000 jobs. For the most part, the surveyed incubators conformed to the usual best practices. In addition, the incubators commonly housed a mix of startup and non-startup tenants and extended services to non-tenant affiliates. But despite the demonstrated ability of the incubators to serve as effective long-term business- and job-creation engines, their status remained uncertain. Only about half of the incubators were financially self-sufficient; the others were at the mercy of unreliable sources of funding capital.
The quickest solution would be for the struggling incubators to begin renting space at market rates. But such a move could undercut one of the main reasons a struggling startup would reside in an incubator. An alternative solution would be to secure adequate long-term support from public agencies. It remains unclear, however, whether public support of technology-transfer communities is nearly as necessary as public support of knowledge-creation communities, which conduct basic (or curiosity-driven) research as opposed to applied research.
In at least one partof Appalachia, local authorities are implementing a comprehensive, strategic approach to technology commercialization. Ben Franklin Technology Partners of Northeast Pennsylvania (BFTP/NEP) works withregional economic development organizations to support a 10-member incubator network. BFTP/NEP is part of a state-funded economic development initiativecreated in 1983. It serves 21 counties, linking early-stage technology firms and established manufacturers with funding, people, technology, universities and other resources.
In 2007, the original Ben Franklin Business Incubator changed its name to Ben Franklin TechVentures and moved into a larger facility after it had operated at capacity for most of its quarter-century in operation. Both BFTP/NEP and its regional economicdevelopment colleagues had been forced to turn away promising companies due to a lack of incubator and wet lab space in the region. Compared to the original building, Ben Franklin TechVentures doubles the available wet lab space and more than triples the office and dry laboratory space available.
BFTP/NEP is particularly proud of its investment in the wet lab space. It recognized there was a scarcity of research and development facilities for startup life science and biotechnology companies. And it saw that real estate developers seldom built wet labs on speculation. And so BFTP/NEP stepped in, making the necessary investment to build the laboratories it believed were critical for spurring innovation and fueling next-generation technologies.
A good example of atechnology incubator in an urban area is the Advanced Technology Development Center (ATDC). Since 1987, ATDC-incubated companies have generated more than $12.7 billion in revenue and more than $100 million of profit.
In 1985, ATDC opened its 83,000-square-foot headquarters building on 10th Street on the Georgia Tech campus. ATDC subsequently expanded to the Middle Georgia TechnologyDevelopment Center in Warner Robins, the Georgia Centers for Advanced Telecommunications Technology (GCATT) on 14th Street in Atlanta, the Ford Environmental Science and Technology Building in the heart of the Georgia Tech campus, and the Chatham Center in Savannah.
In summer 2003, ATDC moved into its new headquarters building in the Centergy One development at Technology Square. This new facility is located in the growing 5th Street corridor of Midtown Atlanta. According to ATDC, it has become a prestigious address for technology companies in Georgia and the de facto hub of entrepreneurial activity in Atlanta.
ATDC announced that six member companies are expected to graduate in 2008. They include Emcien, a product management provider; LCGI, a developer of Webapplications; Neurotic Media, which provides a media distribution platform; Oversight, a business that detects corporate fraud; Terratial Technologies, which provides mobile phone technologies; and Vendormate, a provider of business-credentialing and compliance-monitoring solutions.
A good example of a technology incubator in a suburban setting is the Long Island High Technology Incubator, a 62,000 square foot building on the campus of the State University of New York at Stony Brook. (Stony Brook is on Long Island, a 120-mile long block of land to the south of Connecticut and theeast of New York City.) The incubator, which focuses on the biosciences, boasts of 44 graduates. The graduates have created over 1,000 high-quality jobs, and they generate over $3 billion in annual revenue.
Whether a technology incubator is located in a rural, urban or suburban area, the incubator’s goal is to graduate companies that not only create jobs and generate revenue, but also remain in the area. On this point, recent statistics are encouraging. According to the NBIA, the association’s member companies report that 84 percent of incubator graduates stay in their communities. In an October 2007 report prepared by Battelle’s Technology Partnership Service and the Association of University Research Parks, more than 90 percent of incubator graduates surveyed remained in the region.
The latter report emphasized that a new model for the research park was emerging. In this model, incubation services and mixed-use campus extensions begin to assume greater importance than subsidized rents. Key features in this new model include the following:

  • Substantial space for significant future research growth

  • Housing, recreationalfacilities, daycare services and other amenities attractive to young faculty, postdocs and graduate students

  • Flexible development options, some led by universities and others led bydevelopers.

Technology Sectors Supported by Technology Incubators

Industry Sector Focus Percent Supporting
Information Technology 54
Technology 54
Computer Software 49
Internet 35
Bioscience/Life Sciences 33
Electronics/Microelectronics 28
Telecommunications 28
Computer Hardware 27
Medical Devices 27
Wireless Technology 27
Healthcare Technology 25
Defense/Homeland Security 19
Energy 19
Environmental 19
Nanotechnology 15
Aerospace 8

Data provided by Linda Knopp, National Business Incubation Association. Please note that the data indicate which industry sectors the surveyed incubation programs could assist. (That is, the data do not necessarily reflect the incubators' current client mix. Also, incubators could identify more than one industry sector.)
 *Varga, A. 1997. Regional Economic Effects of University Research: A Survey. RRI Working Paper Series, Manuscript No. 9729. Morgantown, WV.